Analysis of 5% VAT on sectors of education

Posted on by Paul Bacsich

Update 18 September 2024

This study started in June 2024 as a thought-experiment in our team to look at the manifesto pledge from one leading UK political party to “charge VAT on private schools” but analyse widening the scope of this to include other sectors of education, but using the “reduced rate” of 5% for “Some goods and services, e.g. children’s car seats” rather than 20%. Given that AI was used for the calculations and to check them all would have been a lot of work we decided not to release it publicly, just left it on our blog for our internal team.

However, now that VAT on private schools is government policy in the UK, it now seems useful to us to see whether any other sectors of education might generate useful sums if some low rate of VAT were levied and what the benefits (not only to government) might be. In particular if institutions have to charge some level of VAT on fees then they can set the VAT they pay on inputs (such as PCs and software rental) against the VAT they receive on outputs.

It is not quite as inconceivable as some think for governments to charge VAT (or similar taxes) on university fees and fees associated with university-level study in certain situations (some under dispute between Member States and European Commission), as a quick search of EU sites will establish.

(It must also be pointed out that in some EU countries one can charge university fees against one’s tax bill. Swings and roundabouts. To avoid the risk of being boring or going off-topic, we shall also not go into an analysis of countries which subsidise their private schools – such as the Republic of Ireland.)

To avoid panic in HE ranks, the study is purely hypothetical at this stage. But VAT does seem to have an inexorable logic that when it starts in an area, government financial needs and legal cases on inconsistencies tend to widen its scope as the years go by. The issues of “what is a private school” may come to rival the earlier debates on “what is a sweet biscuit”.

Some may have sympathy with the view that university fees might only be subject to VAT on the element that was above student loan tariff (£9250 for undergraduate) in UK, thus in particular for overseas students. There are other refinements one can consider, such as private school fees in England only being subject to VAT on the element above the DfE tariff (around £6000 for secondary schools). There are also issues of compatibility with existing restrictions on charging VAT to students with an EHCP.

We’re more than happy for others to repeat the analysis using Claude, GPI o1, Poe etc. – or even standard researcher analytic skills if keen.

The Copilot Study (June 2024)

The reason for this study was in part to look at some of the advantages of institutions charging VAT (from which they can recover VAT they pay on goods and services, especially IT services) and avoid the appearance of government focusing on just one part of the education sector deemed to be “private” when private institutions and fees can be found in all parts of the education sector (and parts of education subsectors not covered in the analysis below).

From now on, apart from the text in the two Questions below, all output is from Copilot, using data and approaches it found in its training data.

This study used Copilot

Q1. Produce a detailed plan to charge a 5% VAT rate on all fee-paying education in the UK, giving some idea of the revenue this would raise and the benefits this would bring to the need for more investment in IT in schools, colleges and universities. Provide relevant references where you can.

A1. Sure, here’s a detailed plan to implement a 5% VAT rate on all fee-paying education in the UK, along with an estimate of the revenue it could generate and the potential benefits for IT investment in educational institutions.

1. Current Situation Currently, the provision of education by an “eligible body” (which includes a registered independent school) is an “exempt” supply for VAT purposes1. This means that no VAT is charged on the tuition fees of these institutions23.

2. Proposal The proposal is to introduce a 5% VAT rate on all fee-paying education in the UK. This would apply to independent schools, colleges, and universities that currently do not charge VAT on their tuition fees23.

3. Estimation of Revenue To estimate the potential revenue, we need to consider the number of fee-paying students and the average tuition fee. According to data from the Independent Schools Council’s 2023 census, there are 554,316 pupils currently attending Independent Schools in the UK4. The average tuition fee for the majority of students in the UK is around £9,250 a year56.

Using these figures, the potential annual revenue from the 5% VAT could be calculated as follows:

Number of Students * Average Tuition Fee * VAT Rate = 554,316 * £9,250 * 0.05 = Approximately £256 million

Please note that this is a rough estimate and the actual revenue could vary depending on various factors such as changes in the number of fee-paying students and tuition fees.

4. Benefits for IT Investment The revenue generated from this VAT could be directed towards improving IT infrastructure in schools, colleges, and universities. This could include:

5. Implementation The implementation of this VAT rate would require legislative changes and would need to be communicated effectively to all stakeholders. It would also be important to provide support for institutions and parents during the transition period.

6. References 23147

Please note that this is a hypothetical scenario and any changes to the VAT rate would need to be decided by the government. It’s also important to consider the potential impact on families and institutions, as well as the wider implications for the education sector. This plan is intended to provide a high-level overview and further detailed analysis would be required to fully understand the potential impacts.

Learn more

1farrer.co.uk2taxpolicy.org.uk3gov.uk4tutorful.co.uk5bing.com6savethestudent.org7gov.uk8study-uk.britishcouncil.org9bbc.co.uk10studying-in-uk.org11ifs.org.uk12chsonline.org.uk13schoolguide.co.uk14gov.uk15officeforstudents.org.uk16bing.com17pepf.co.uk18gov.uk19enterprise.cam.ac.uk20growthbusiness.co.uk21gov.uk+17 more

Q2. Your answer covered just independent schools. Please extend the analysis to all FE colleges and to all universities. For universities consider the application of VAT just to fees for overseas students.

A2. Sure, let’s extend the analysis to include Further Education (FE) colleges and universities.

1. Further Education (FE) Colleges

Number of Students×Average Tuition Fee×VAT Rate=2,990,120×£8,200×0.05≈£1.23 billion

2. Universities

Number of Students×Average Tuition Fee×VAT Rate=2,413,155×£9,250×0.05≈£1.12 billion

3. Universities – Overseas Students

Number of Overseas Students×Average Tuition Fee for Overseas Students×VAT Rate=679,970×£22,200×0.05≈£0.75 billion

Please note that these are rough estimates and the actual revenue could vary depending on various factors such as changes in the number of students and tuition fees. Also, the implementation of this VAT rate would require legislative changes and would need to be communicated effectively to all stakeholders. It would also be important to provide support for institutions and parents during the transition period1221314713910.

Learn more

1explore-education-statistics.service.gov.uk2prospects.ac.uk3explore-education-statistics.service.gov.uk4bbc.co.uk5timeshighereducation.com6savethestudent.org7universitiesuk.ac.uk8bing.com9commonslibrary.parliament.uk10studying-in-uk.org11study-uk.britishcouncil.org12timeshighereducation.com13gov.uk14gostudyuk.com15bing.com16bing.com17sheffield.ac.uk18gov.uk19statista.com20universitiesuk.ac.uk21explore-education-statistics.service.gov.uk22explore-education-statistics.service.gov.uk23ethnicity-facts-figures.service.gov.uk24bing.com25salford.ac.uk26ons.gov.uk27universitiesuk.ac.uk28savethestudent.org29thecompleteuniversityguide.co.uk30bing.com31hesa.ac.uk+29 more

Q3. Finally add in all providers of nursery-level education and child care.

A. Sure, let’s extend the analysis to include providers of nursery-level education and child care.

1. Nursery-Level Education and Child Care

For part-time nursery:

Number of Children×Average Tuition Fee×VAT Rate=5,700,000×£8,199.36×0.05≈£2.34 billion

For full-time nursery:

Number of Children×Average Tuition Fee×VAT Rate=5,700,000×£15,709.20×0.05≈£4.47 billion

Please note that these are rough estimates and the actual revenue could vary depending on various factors such as changes in the number of children and tuition fees. Also, the implementation of this VAT rate would require legislative changes and would need to be communicated effectively to all stakeholders. It would also be important to provide support for institutions and parents during the transition period65781234.

Learn more

1daynurseries.co.uk2moneyhelper.org.uk3daynurseries.co.uk4daynurseries.co.uk5explore-education-statistics.service.gov.uk6earlyyears.blog.gov.uk7explore-education-statistics.service.gov.uk8gov.uk9bing.com10statista.com+7 more

Show learn more suggestions

  • How would this impact parents’ ability to afford child care?
  • What other areas of education or childcare could benefit from additional revenue?
  • Are there any potential challenges in implementing VAT for nursery-level education and child care providers?

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